• Implied volatility in gold across tenors continues to fall and is at an all-time low for the data we have going back 10-years, largely a result of the flat performance this year, as well as low expected future volatility in the gold price

Gold 3-month implied volatility

• Globally, gold-backed ETFs experienced outflows of US$536mn last week, driven by North America and are continuing the weak trend from April. April ETF flows will be released at 8am EST (Tues) and show a decline of 2% of holdings last month
• Gold bounced off the 200-day moving average of $1,267 but remains below the important $1,290 level which could act as resistance

• Comex net longs increased last week from 112t to 218t, despite the weakness in the gold price

• Broad Markets: The Fed’s commentary following the US economic data last week that dislocations were seen as transitory was perceived as more hawkish by market participants. As such, the implied probability of a rate cut in 2019 based on bond prices fell from 70% to 50% and the 2/10 yield curve in the US flattened to 19bps. This drove the US stock market lower on Wednesday and Thursday. However, shorts were squeezed on Friday on incredibly low volume and strength in technology stocks, reverting the pullback. By the end of the week, the US stock market finished flat. Other global stock markets also finished less than 50bps higher. Oil was down 2%, driving the overall commodities index down 1%. The US dollar finished down slightly to -0.5%. Today (May 6) the US stock market was meaningfully lower and the Chinese stock market was down over 6% last night as negotiations have stalled and news came out that the US will increase tariff rates and US$ value amounts further on Chinese goods starting this coming Friday. Commentary related to future negotiations is likely to drive global markets this week. In addition, keep an eye out on the VIX futures as they are at incredibly short levels; further stock market pullbacks could cause a spike in the VIX, with futures positioning fueling further stock market deterioration.

• US/China relations drove global markets across asset classes last week, with back and forth positive/negative chatter, primarily from the US, which culminated with the US adding additional tariffs against China; Stock markets were meaningfully lower last week (US: -2.5%, Europe: -3%, EM -5%, China -5%). The significant short futures’ exposure in the VIX we discussed, and its potential impact on stock markets, played a role in market behavior; the move lower in stocks drove the VIX 50% higher at one point, near the long-term average level of 20. The VIX futures curve also inverted, something we see during times of significant stress (this happens less than 5% of the time historically). Rates fell across the globe last week, although there was no major impact on the yield curves. Agriculture commodities were lower (largely a function of increased tariffs) as the broader commodity index lost 1.5% last week. Over the weekend, China retaliated imposing tariffs on the US and increased its negative rhetoric toward the US in their state-owned media. Stock markets are sharply lower this morning (particularly those with the most China exposure, like Apple and semi-stocks); Treasuries are bid; the US 3m/10y is nearing negative territory again, and the German 10yr is back to negative. Despite the risk-off move today, the US dollar is lower, while gold is bid. Bitcoin broke out of its resistance level and is currently up 17% this morning (~7,400); that puts it up 30% over the past week.

• Gold is at an important technical level.

1. It is trying to break back above the neckline of the head and shoulders bearish break it made in April
2. It is trying to break out of the downtrend resistance line that began in February,
3. It is trying to close above the 200-day moving average of $1,295 and:
4. It is trying to close above the psychological level of $1,300. Any or all of these confirmations would be bullish for the price of gold.

Price of gold

Source: Bloomberg, World Gold Council

• Globally, gold-backed ETFs experienced outflows of US$475mn last week, and are continuing the weak trend from April. North American funds, once again, drove outflows last week with the majority of global outflows coming from the region. European funds had inflows. All regions except Europe have experienced outflows of greater than 1% of AUM this month, while European funds have added a small amount of assets. Total global assets have now fallen over 1% on the year, despite European funds adding 2% during the same period.

• COMEX net longs increased for a second week in a row from 218t to 243t. May volumes gold trading are in line with April averages at $105bn a day.

COMEX Net Long

Source: Bloomberg, World Gold Council

• Implied volatility remains near all-time lows, but we would expect call skew (the premium investors are paying for upside exposure) to rise given the move higher in gold today.

• Equity and fixed income markets whipsawed once again last week, primarily on escalating US/China trade rhetoric (see below). Stock markets in Europe were higher by 2%, China was lower by 2%, and the US was lower by 1%. EM stocks felt the most pain falling 4% in dollar terms as their currencies weakened. Generally, stock prices and bond rates tend to move in tandem but this has shifted this year. Rates and stock market levels continue to decouple, with rates falling and stock markets rallying. The 3m/10yr curve in the US is flat to negative again, and the absolute rates in the US 2yr and 10yr, are back at levels seen in late 2017/early 2018 when the Fed’s effective rate was 1% lower. The strength in the stock market is being impacted by monetary policy as well as the market’s perception there will be easing in the future. The implied probability of a Fed cut this year increased sharply again last week to 75%, despite the US stock market falling less than 1%. Commodities were higher by 1% last week, led by oil which was higher by 2%, as OPEC suppliers suggested their intention to keep supplies constrained for the remainder of this year.
• This week (5/20 – 5/24) is a busy one on the macro front with Fed officials speaking throughout the week, FOMC and ECB minutes, as well as EU Parliament elections. The decision over the weekend by the US to ban Huawei is likely to put a significant damper on the US/China talks, which has led other countries to follow suit, impacting the global supply chain. Stock in India and Australia rallied sharply today as it appears Modi will retain power in India, and there was a surprise election victory for conservative Prime Minister Morrison.

Source: Bloomberg

• Gold fell slightly last week despite starting the week strong, on Monday, closing above $1,300 (LBMA -0.5%, XAU -0.7%) as stock markets rallied back sharply during the middle part of the week; this risk-on environment along with the strength in the US dollar last week (up 1%), is creating a headwind in the price of gold. COMEX net longs increased sharply for a third week in a row from 243t to 399t driven by an increase in net speculative positioning. May trading volumes are in line with April averages at $105bn a day. Gold remains flat on the month and year, which is reflected by extremely low implied and realized volatility.

Source: Bloomberg, World Gold Council

• Globally, gold-backed ETFs experienced inflows of US$183mn last week, coming from Europe and North America; the first week of inflows for North America this month. Asian funds had significant outflows last week (-141mn); that represents a loss of 5% of Asian assets in one week. Asian funds have now lost 17% of assets this year. On, the month, Europe is the only region with positive flows, with an increase of 1% of assets. Year-to-date there have been global outflows of $973mn or 1% of assets, again with European funds having the only net inflows globally.
• Technicals – Gold moved above $1,300, its 200-day moving average, and neckline on Monday, but failed to hold, falling back to where it began the week. Those levels continue to be important ones for the price to have a meaningful breakout to the upside. The 50-day moving average of $1,270 should act as support.

Broad Markets

• Stock markets across the globe continued their downward price trend last week amidst higher volatility as US/China trade rhetoric continued
• US tech stocks were hit the hardest, dropping by 2.7% on the week and 6.6% month-to-date, as President Trump’s decision to ban Huawei has had a ripple effect
• European stocks fell by 2% and Chinese stocks by 1%
• Commodity prices also fell, led by oil which dropped 6.6% on the week and a cumulative 7.4% m-t-d
• As uncertainty increased, investors looked for high-quality assets, pushing US Treasury bond yields lower and flattening the 2s/10s curve further (lowest level for the curve since the December stock market selloff, and the lowest absolute level in the 10y since Q3 2017)
• The US 3m/10y curve is once again negative as well, at levels seen during the financial crisis. Bond investors now expect an 80% chance of a rate cut by the end the year
• In Europe and Japan, front end yields rose, but long-term ones well, which can be interpreted as a bearish view on long term growth. This flight to quality also supported gold (see below)
• During this holiday-shortened week, investors will continue to focus on US/China trade discussions and insights into the choice for Britain’s next prime minister.

Gold

• Gold rose last week as global markets were ‘risk-off’ and the US dollar fell 0.4% (LBMA 0.1%, XAU 0.6%)
• COMEX net longs decreased meaningfully from 400t to 248t after increasing for three straight weeks after net speculative longs fell to nearly flat again
• May gold trading volumes increased last week and are now averaging $113bn a day in May; levels in line with the ytd average, but 9% over April averages
• Gold remains flat on the month and year, which is reflected by extremely low implied and realized volatility.

Comex Net Longs

Gold-backed ETF flows

• Globally, gold-backed ETFs experienced inflows of US$33mn last week, coming from North America; the second week in a row of inflows for North America this month
• Asian funds had outflows again last week, having lost 7% of its assets this month and 18% of assets this year
• On, the month, Europe is the only region with positive flows, with an increase of 1% of assets
• Year-to-date there have been global outflows of $923mn or 1% of assets, again with European funds having the only net inflows globally.

Gold price

Technicals

• Gold continues to trade below the psychological level of $1,300, which coincides with the 200d moving average, and below the downtrend resistance line
• The 50d moving average at $1,275 should act as intermediate support, and we would not expect gold to move sharply either direction unless it is able to close above the 200d or below the 50d.

Broad Markets 

• Stock markets across the globe finished the month sharply lower, their worst monthly return since the December 2018 sell-off. Monthly stock returns globally: (US Tech -9%, Japan -8%, EM -8%, US S&P 500: -6%, Europe -6%, China -6%). 
• US/China trade rhetoric continues, but the most recent downturn is related to the surprise announcement that the US plans to impose tariffs on Mexico in the coming weeks.
• Commodity prices fell last week, led by oil which dropped 8% on the week and a cumulative 15% in May. 
• 3m/10y curve is the most negative it’s been since the financial crisis at -20bps. Interestingly, the 2y/10y curve actually steepened last week, despite falling yields, as the probability of a Fed rate cut this year skyrocketed to nearly 100%. 
• The December forward rate in the US is 1.75% signaling the market expects 2-3 rate cuts this year (Probability of a cut: 50% by July and 80% by September). The German 10y yield appears to be at an all-time low of -20bps. 

Fed Rate cut probabilities

Source: Bloomberg

Gold movements:

• Gold rose sharply last week (LBMA 0.9%, XAU 1.6%), mainly during Friday’s stock market sell-off
• Despite the flight to quality, the US dollar was mostly unchanged -0.1, with gold assuming the safe-haven-asset role during the week. 
• Gold finished the month 1.71% higher (the strongest month since January this year); gold is higher by 1.9% on the year, while long USD gold is higher by 4% on the year, now outpacing emerging market stock performance in USD terms. 
• We often highlight gold’s role as a safe haven during periods of pronounced sell-offs or an increase in systemic risk. Gold was relatively flat when there were small movements in the market over the course of the month, but looking at periods when the US stock market was down more than 1% in a day (4 times), gold was higher by 90bps on average each of those days.
• Technicals – Gold broke out strongly to the upside last week (above its 200d moving average and downtrend resistance line) and is continuing this trend to begin this week. Technical traders will focus on the $1,365 level, which has been a multi-year resistance level.

Gold Price

Source: Bloomberg

• Options: Gold options put/call skew is the highest it’s been since 2016 (the difference between the implied volatility in calls versus puts). This is also reflected in call skew (at-the-money implied volatility versus upside implied volatility), which is in the 96th percentile over the year, and in put skew (at-the-money volatility versus downside implied volatility) which is in the 2nd percentile over the past year. This means that investors are paying an extreme premium for upside exposure in gold, and not paying a premium for downside exposure. This is bullish.

Gold put/call skew (3-month 120% - 80% strike options)

Source: Bloomberg

• ETF Flows: Globally, gold-backed ETFs experienced inflows of US$361mn last week, coming from all regions; What started as meaningful outflows to begin the month, concluded with only minor outflows, largely because North America reversed many of its losses late in the month. Global outflows were $200mn on the month or 20bps of total assets. North American funds lost 1.2% of its assets while European funds gained 1.2% in assets. Asian fund continue to have strong outflows, losing 6% on the month and 17% this year. We will be releasing our monthly (May) gold-backed ETF flows report this Thursday at 8am EST, which will provide in-depth color on market activity.

What happened and some potential catalysts:

• On Thursday, gold traded higher by more than 2%, closing above $1,390, the highest level since 2013 and the largest single day move since late 2018, and is continuing its push higher early this morning.
• Gold is up more than 6% (in US dollars) in June, the strongest one-month rally in two years
• The move is a byproduct of persistent levels of uncertainty, lower rates and momentum
• The Fed’s dovish statement on Wednesday all but confirmed market expectations that they will cut rates at least once and, according to market expectations, up to three times by the end of the year
• The 10-yr yield briefly traded below 2% on Thursday – a level not seen since 2016 – while the US dollar continued to weaken
• As we’ve noted in our recent research and commentary, gold tends to perform well when the Fed shifts to a neutral or dovish stance
• Other positive potential catalysts include growing geopolitical concerns between the US and Iran, trade tensions, Brexit concerns and other macro risks.

Technicals:

• $1,365 was a multiyear resistance level many traders viewed as an important barrier to substantiate a bullish call on the price of gold
• The sharp move through that level on heavy volume is very positive, suggesting the supply of sellers has subsided and there is potential upside

Gold futures price (weekly chart)

Source: Bloomberg

• We noted on Monday (6/17) the bullish positioning in the gold futures market as COMEX net longs continued to increase; similarly, investors are paying a premium for gold call options, while put options are inexpensive as investors are not focused on downside exposure.
• There have been justifiable reasons for the rally, but the price of gold has moved significantly higher in a very short period of time, and $1,400 could act as a psychological and technical resistance level.
• In addition, the relative strength (RSI) of the gold price on a weekly basis it is at the highest level since 2011 which preceded a sell-off.

  
Gold weekly relative strength index (RSI)

Source: Bloomberg

• However, gold’s RSI reached similar levels in multiple occasions prior to that in 2010 and 2011, prior to large rallies.
• While there is evidence of both pullbacks and continued strength following these significant rallies in the past, it may take a few days to determine if the recent trend can continue
• If the price were to fall back to the $1,365 level and hold, it could stimulate heightened confidence in the potential for continued price momentum.

Things to watch today (6/21):

• The CFTC’s Commitment of Traders report is released today at 3pm and will show COMEX net longs as of Tuesday (6/18) – which is a barometer of momentum positioning. A continued upward trend could be a sign that investors are becoming increasingly optimistic about the direction of the gold price
• Today is also a quadruple-witching day in the markets (a day of expirations across multiple types of securities) that can lead to broad market volatility and could impact the price of gold

The above commentary is not investment advice and should be considered informational only.

• Gold had its largest weekly move to the upside since April 2016 (LBMA 3.4%, XAU 4.3%) continuing its move higher for a fifth straight week–this was likely driven by the US dollar falling sharply (-1.4%) and the price of gold breaking out of the key technical resistance level of $1,365 (discussed in depth on Friday). Gold is having its best month in two years, having rallied nearly 8% in June, while it is up 10% over the past month.

Gold price:

Source: Bloomberg

• Strong inflows continued into gold-backed ETFs with $1.9bn coming in globally last week. This was driven primarily by North America which had $1.8bn of inflows. On the month, there have been nearly $5bn of inflows globally, with assets growing well over 4%. Global inflows are $4.4bn on the year, led by European funds, that have added $3.4bn or 77% of global net inflows.
• GLD had its most one-day inflows in percentage of AUM and ounces since April 2008, and its most one-day inflows in US dollar terms ever.
• Implied volatility exploded to the 100th percentile (~14), over the past year, across tenors, with levels not seen since early 2017. Realized volatility (60-day) is still in the single digits, somewhat low historically. Put/Call skew remains in the zero percentile, as investors are paying a premium for upside calls.

Gold 3m implied/realized volatility 

Source: Bloomberg

• COMEX net longs continued to increase meaningfully to 737t from 641t, a level not seen in over a year; it is worth noting that these numbers were as of Tuesday, and did not incorporate the 4% price move from Wednesday through Friday, which likely saw additional long positioning. 

Source: CFTC

• Gold trading volumes have increased significantly in June ($148bn vs ytd average of $115bn), particularly in the LMBA OTC market, which has seen averages increase 50% this month.